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Buying a home with cash: what to know before you skip the mortgage


About one-fifth of home buyers pay cash instead of getting a mortgage these days. But is buying a house with cash the smart thing to do?

The answer depends on the motivations and the goals. If you want to buy a house with cash to avoid paying mortgage interest, you should consider how much that money could grow if you invested it instead. If your goal is to beat other bidders for a home, the cash purchase will get the seller’s attention. However, you will still have to bid competitively.

Before you commit to buying a home with cash:

  • Identify how you hope to earn by making a cash purchase.

  • Don’t assume money is better.

  • Think about the benefits you could get from getting a mortgage instead.

  • Congratulate yourself on having a big bank balance!

How to buy a house with money

Buying a house with cash is much the same as buying with a mortgage, with the giant exception of not having to apply for a loan and all the paperwork involved.

Once your offer is accepted, you will make a honest money deposit, make sure a title search is done, do a final check, and proceed to a fence, where you will sign the documents to transfer ownership. You could do a home inspection and even hire an appraiser.

While you won’t have to provide information to a lender, you will need to provide information from a financial institution.

“One thing a cash buyer will need to do is provide proof of available financing within days of an agreement or even before signing a contract,” says Tomas Satas, real estate agent, real estate investor and CEO of Windy City HomeBuyer. , in Chicago. Also called proof of funds, this proof can take the form of a bank statement or letter from a financial institution.

Satas adds that you shouldn’t ignore due diligence just because you can. “Cash buyers should not ignore important details such as inspections, investigations, termite letters and title insurance“He said.” A good lawyer who doesn’t let these things fall through the cracks is vital. “

Buying a home with cash may seem satisfying, but it’s not necessarily the optimal choice for anyone who can afford it.

Reasons to buy a house with money

You don’t want to pay interest

A mortgage is expensive. On a $ 300,000 mortgage with an interest rate of 3.25%, you would pay about $ 170,000 in interest over 30 years. When you pay cash for a house, you avoid paying all that interest, let alone going into six-figure debt.

Buying a home with cash does not eliminate recurring expenses. You will still pay property taxes and, if you are wise, home insurance. But, you can take the money you would have spent on monthly mortgage payments and save it for retirement or emergencies (or spend it).

You compete with other buyers

Sellers know that a lot can go wrong while a lender is processing a mortgage application. Buyers mess up credit, lose jobs, and fail to submit documents on time. Lenders misplace paperwork and make mistakes.

These problems are common and can lead to loan delays or outright refusals. Sellers are aware that these issues affect mortgage borrowers but not cash buyers.

Home sellers value the certainty that cash buyers will be able to complete their purchases on time, says Hiro Kurokawa, founder of WeOfferQuick.com, a company that buys homes in Dallas for cash. “Some sellers will appreciate this enough to choose a cash buyer over a traditional buyer with a higher bid price,” he said in an email.

Another advantage of cash payment is that you can close earlier. Cash buyers can often become homeowners in two weeks or less, while it often takes four to six weeks to close a mortgage. When a seller is in a hurry, a cash buyer can have a competitive advantage.

You don’t want to be at the mercy of a review

Cash buyers have the option to skip or ignore a valuation. Mortgages, on the other hand, require evaluations. If a home is priced below price, the lender can expect the borrower to have an amount of cash equal to the difference between appraised value and price – in essence, a larger down payment. . If the borrower does not have enough cash on hand, the transaction will fail unless the seller reduces the price.

“As prices rise rapidly and what people are willing to pay exceeds appraisals, a cash buyer is often the only person able to pay what the market demands,” says Janie Coffey, real estate broker and investor in St. Augustine, Florida. .

You find it difficult or impossible to get a mortgage

Sometimes it is difficult to qualify for a mortgage due to issues with the property, and sometimes due to issues with the buyer.

Mortgage lenders “don’t usually finance a house in bad shape,” Kurokawa says – so you could be paying cash for a house that needs work before it’s habitable. However, various renovation loan The programs allow you to buy a building to renovate and include the renovation costs in the loan.

Some buyers may be blocked by a “thin credit report“which means they don’t have enough information on credit reports to generate a credit score, which is necessary to get a mortgage. A thin credit report can happen to immigrants, to citizens who have returned to the United States after living abroad for many years, those who avoid the use of credit, new singles and those who have been incarcerated.

You can inflate a thin credit report, but it takes time. Meanwhile, if you are in a hurry and have money, you can buy a house with money.

Don’t assume money is better

Most sellers are looking for the best price and the best deal, says Tricia Lee, associate real estate broker in Brooklyn. Mortgage borrowers can win bidding wars by bidding more. Don’t expect a cash discount.

“Buyers shouldn’t think cash will automatically get you a better price, because it often doesn’t,” Lee said by email.

But sometimes a cash bid can be the winning bid, even at a lower price, she added. This could be the case if the seller buys another home and a delay puts that transaction at risk. “It’s the agent’s job to decipher whether this is the case for each particular salesperson,” Lee said.

Reasons to get a mortgage instead of buying cash

You will get by investing the money

In many cases, getting a mortgage is the rational route. There might be more productive ways to use the money, even if you have enough money to pay for a house.

“Otherwise, what would you do with the money?” That’s what Nick Holeman, head of financial planning at online financial advisor Betterment, asks cash buyers.

When you spend money on a house, you aren’t investing it for your children’s retirement or college expenses. By investing the money in a diversified, tax-efficient portfolio, “you could probably get a better return than the mortgage rate,” says Holeman.

For example, if the mortgage interest rate is 3.5% and you could earn an investment return greater than 3.5% in a diversified, tax-efficient portfolio, you get the benefit by investing the money.

“Don’t sacrifice your other financial goals to make a cash purchase,” says Holeman. “If you’re determined to make a cash purchase and you can’t do it without dipping into your retirement accounts and your emergency fund and your children’s college fund, well, you buy a house. too big.”

You will need the money for other things

You are likely to have unforeseen expenses and reductions in income over the years. Roofs are leaking, water heaters are broken, employees are laid off, people are falling seriously ill. Cash comes in handy when these things happen.

“You will likely run out of money for emergencies, repairs, and major purchases if you spend all your money to buy the house,” said Tal Shelef, real estate agent and co-founder of CondoWizard, in Toronto by email. “Since unexpected things always happen, when you decide to pay with cash, be sure to save some for emergencies.”

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